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Saturday May 15th, 2021

Sri Lanka-style Trump steel taxes slammed; construction, exports, final goods, hit

ECONOMYNEXT – Donald Trump’s 25 percent import tax slapped on steel and 10 percent aluminium to reduce imports and to give extra profits to some domestic producers will hit construction and other companies that make final goods in the US as well as undermining trade freedoms, the International Monetary Fund and industry group said.

"The import restrictions announced by the U.S. President are likely to cause damage not only outside the U.S., but also to the U.S. economy itself, including to its manufacturing and construction sectors, which are major users of aluminum and steel," IMF spokesman Gerry Rice said.

A Mercantilist’s Ransom

In Sri Lanka total tariffs on steel was raised to as much as 90 percent which includes customs duty, cess, port and airport levy, nation building tax, Murtaza Jafferjee head of JB Stockbrokers told a forum organized by Advocata Institute, a Colombo-based think tank.

A value added tax is charged on top of customs duty,

In the last decade taxes on basic items needed to build houses and also food has been raised to give large profits to politically connected businesses and producer lobbies, sending production costs cascading across the value chain into final goods.

Sri Lanka’s hotels for example would be find it difficult to compete against East Asia with high production costs or take longer to recover their investment.

"A young couple trying to put roof over their heads will have to pay a ‘ransom ‘ to these domestic producers," explains EN economic columnist Bellwether.

The import duties will also be a tax on US exports.

The import duties on imports will also hit US exporters whose raw material costs will move up as well as industries catering to American consumers.

Effective Taxation

Such ‘effective taxation’ is one of the reasons identified for Sri Lanka’s weak export diversification.

US producers of final goods that use steel, such as Caterpillar or John Deer will no longer be able to effectively compete against Japanese heavy equipment makers, despite Japan importing all its steel and iron ore. Such firms will also lose out against Korean, or Chinese firms.

To compete internationally, US firms dependent on steel would have to move more of their production outside the US.

"We are concerned with the unintended consequences the proposals would have, particularly that it will lead to higher prices for steel and aluminum here in the United States, compared to the price paid by our global competitors," Matt Blunt, president of the American Automotive Policy Council, said in a statement.

"This would place the U.S. automotive industry, which supports more than 7 million American jobs, at a competitive disadvantage."

"Like most brewers, we are selling an increasing amount of our beers in aluminum cans, and this action will cause aluminum prices to rise," MillerCoors said in a message.

"It is likely to lead to job losses across the beer industry.

"We buy as much domestic can sheet aluminum as is available, however, there simply isn’t enough supply to satisfy the demands of American beverage makers like us.

"American workers and American consumers will suffer as a result of this misguided tariff."

"The implementation of these aluminum tariffs … will drive up the costs of the aluminum used to manufacture more than 111,000 aluminum boats, such as pontoons and fishing boats, which make up 43 percent of new powerboat sales each year," Thom Dammrich, president of the National Marine Manufacturers Association, said in a statement.

"Further harming the industry, the aluminum sheet our members are forced to source overseas will likely continue to be in short supply in the U.S., destroying our members’ ability to build boats in the U.S. As a result, the jobs of the American workers who build these boats, their engines and components, are now in jeopardy.”

Trade War

Meanwhile exporters of steel and aluminium to the US are warning of a trade war. Trump has said he likes trade wars.

"We must protect our country and our workers. Our steel industry is in bad shape," Trump, claimed in message, in presenting a typical economic nationalist view.


Ironically import taxes were pioneered by Alexander Hamilton, a US founding father as a temporary leg up to start-up firms (so-called infant industry), but industries that benefit from import taxes are past their prime and are geriatric.

Adolph Wagner, who helped import the idea to Europe, even applied it to agriculture as part of an economic nationalist philosophy called agrarianism.

Economic nationalism and German Historical Economics, tinged with Marxist-statism, ultimately helped take free trading, liberal Germany towards National Socialism and self-sufficiency (Nazi-autarky), analysts say.

The ideas retreated after Hitler was defeated and liberals came back to power after the war, generating the so-called German Economic Miracle with a strong Deutsche Mark.

The European Union warned Trump, saying they will respond ‘firmly’ implying a trade war was on the cards.

"We will not sit idly while our industry is hit with unfair measures that put thousands of European jobs at risk," European Commission head Jean-Claude Juncker said.

IMF urged other countries not to engage in a trade war.

"We are concerned that the measures proposed by the U.S. will, de facto, expand the circumstances where countries use the national-security rationale to justify broad-based import restrictions," IMF’s Rice said.

"We encourage the U.S and its trading partners to work constructively together to reduce trade barriers and to resolve trade disagreements without resort to such emergency measures."

Own goal

The final irony is that the cost of protectionism, the higher prices, the inefficiencies, high profits of the protected business-owners are not borne by foreigners but by the domestic population at large.

The poorest Americans who can least afford for competition to be restricted, will be the biggest losers.

“Make no mistake, this is a tax on American families," Matthew Shay, president of the National Retail Federation, said in a statement.

"When costs of raw materials like steel and aluminum are artificially driven up, all Americans ultimately foot the bill in the form of higher prices for everything from canned goods to electronics and automobiles.

"The reality is that there is nothing this country will gain from such a one-sided policy. These tariffs threaten to destroy more US jobs than they will create while sending an alarming signal to our trading partners and diminishing markets for American-made products overseas.”

Private Interest vs National Interest

Free market capitalism benefits the poor due to competition, either from other domestic businesses or from abroad. When competition is taken away by the state, capitalism turns into Mercantilist profiteering and greed.

Predictably only US steelmakers were happy.

"This is our moment, and it’s really important that we get this right," David Burritt, the CEO of US Steel, as his stock price jumped while the US stock index slid 600 points.

"This is vital to the interests of the United States," he added, falsely equating his own interest to the national interest as Mercantilists and protectionists always do.

Adam Smith, warned centuries ago that this is what Mercantilists do and warned against ordinary people from equating their interests with that Mercantilists.

"Their (domestic producers/Mercantilists) superiority over the country gentleman is not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his," wrote Smith in Wealth of the Nations.

"It is by this superior knowledge of their own interest that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction that their interest, and not his, was the interest of the public."

"The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public.

"To widen the market and to narrow the competition, is always the interest of the dealers.

"To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens." (Colombo/Mar03/2018)

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